Investing_in_Apple_Through_Changing_Markets

Investing in Apple through changing markets Veronica Fritsch MGT/521 May 23, 2011 J. Allison Kazerounian Investing in Apple through changing markets Global economy is constantly in a state change. Countries change from prosperous states to floundering states. The change can be quick, in matter of a year or less, or the change can occur slowly over decades. Businesses need to take into account the changes in economy when setting up strategies and tactics. To be successful businesses must have the capabilities to change with the economy to meets current consumer needs, demands, and spending habits. Apple, Incorporated has proven resistant to the economic tide. Some of Apple’s resilience may be credited to a frequent supply of new products, favorable pricing from suppliers, and its ability to put money into savings (Krazit, 2009). Apple has continued to release new products throughout the recession started at the end of 2007. Between 2007 and 2011, Apple released the iPod Touch, iPad, and iPhone (Wikipedia, 2011). Subsequent to those releases there have been various updates on existing products such as the iPhone 4, iPad 2, and iPod Shuffle (Apple, 2011). According to Tom Krazit, Apple was able make a little extra money on its products because of a lowering of chipmaker and display vendor pricing. As sales increase the small amount extra that Apple is making on each product snowballs into a larger additional profit. Apple’s war chest is exceeding both internal and external expectations. In April 2011 Apple had an astounding $65.8 billion in cash or cash equivalents (Rusli, 2011). Whereas the company has not had a net loss since before 2008 (Apple, 2010), with a large stock of cash Apple will be ready to counteract a loss if it does occur. Apple appears ready and able to handle the economic downturn. An option for this global company to remain in the black is to continue to sell and market its products worldwide. Apple can be found in more than 75 countries across Asia, Europe, Africa, the Middle East, North, and South America (Apple, 2011). This is already a large market, but still allows more growth into other countries and an increase of store availability. Apple may need to consider this option if the economy does not improve as predicted. Another method to survive this economic storm is for Apple to continue to improve on its existing products and continue to release new types of products. Apple has been a forerunner in releasing new technology gadgets and must remain that way to stay in the top. The company can also invest some its surplus in buying other smaller companies that can be intermixed into its current products. One such example would be purchasing Netflix for the Apple TV as noted by Evelyn Rusli from the New York Times (2011). The wider the range of products and services, the more the company can continue to prosper. On the 2011 Fortune 500 list Apple is ranked at 35th, which is a 21 spot increase from its former 56th spot. Apple ranked 196th on the Fortune Global 500 list, which pits the company against companies worldwide rather than companies based in the United States of America. According to CNN Money this success occurred as the company expanded its current markets and continues to create new ones (Fortune 500, 2011). The rankings are based on company gross revenue. The list includes both public and private owned companies providing for a large amount of competitors. Despite Apple’s location on both lists, this information alone is not enough to prove Apple to be a safe investment. Additional information that needs to be included in an investment decision is Apple’s financial standing and marketability. Apple towers over competitors in its financial statements. Apple’s current ratio when calculated from its March 2011 financial statement is $1.93 (Apple Investors, 2011). Apple is overshadowing Hewlett-Packard’s (HP) current ratio of $1.17 (Hewlett-Packard Company, 2011), Samsung’s of $1.20 (Samsung Electronics, 2011), and Dell’s of $1.45. Apple has more assets per dollar of liability than three other major electronic companies. This good standing is the result of limited liabilities and an increase of assets. A second financial ratio that should be considered by mutual fund managers is the debt to owners’ equity ratio. Companies must be able to pay back the debts they acquire or face negative actions such as bankruptcy or buy-outs. Apple’s debt to owners’ equity ratio is 54% (Apple Investors, 2011). The goal with the debt to owners’ equity ratio is obtain a percentage below 100% because a financially stable company should not have more debt than equity. Hewlett-Packard is failing with 188% (Hewlett-Packard Company, 2011) and Dell appears to be floundering with a 445% debt to owners’ equity (Dell Inc., 2010). Samsung’s debt to owners’ equity ratio is 49% (Samsung Electronics, 2011), which is below Apple’s by 5%. When looking at debt to owners’ equity the wisest company to invest in is Samsung followed by Apple. However, both companies are well below the dreaded 100% mark and should be sound investments. The return on sales ratio compares similar companies by providing information on the company’s ability to generate profit from its sales. Apple’s return on sales percentage is 24% (Apple Investors, 2011). The return on sales is a comparison ratio so when compared to Hewlett-Packard, Samsung, and Dell, Apple achieved the top spot. Apple’s 24% on return on sales trumps Hewlett-Packard’s eight percent (Hewlett-Packard Company, 2011), Samsung’s seven percent (Samsung Electronics, 2011) and Dell’s five percent (Dell Inc., 2010). Apple’s ability to generate profit from its sales is impressive against industry standards, which appear to be in the high single digits. Financial information provides various facts and figures for mutual investors to use when deciding upon investment opportunities. Nevertheless, more information is needed to make an educated decision on whether or not to invest in a company. Marketability of a company’s products is another measure of ability. An easy way to determine consumers’ preferences is to search the best selling products on various websites. Most retail websites list consumer favorites when a consumer searches a type of product such as laptops. The list of products will typically be ranked from best to worst selling. To determine Apple’s rank in the best selling list on Target, Best Buy, and Wal-mart’s sites require a simple click of the mouse. Apple’s iPod line has several models, all of which play music. Dependent upon the model, iPod users can watch movies, use it as a pedometer, and even participate in a video conference. Apple iPods are listed as the top five best sellers on target.com, and it should be noted that Target only sells five versions of iPods (2011). On bestbuy.com various versions of the Apple iPod earned spots in the top 11 MP3 players when ranked by best selling with the Sony Walkman in spot 12 (2011). Out of four top-selling spots located on walmart.com the top three belong to Apple. The fourth spot is a Zune HD Media Player (2011). With Apple iPods in the top spots on three major retail websites they seem to have left their mark on the MP3 market. Consumers’ desire for the iPod is much higher than the desire for the iPad based on best selling information. The iPad, a touch screen handheld computer, was sold out at target.com so no comparison could be made for that company. However, at Best Buy the Apple iPad is the number one and three best seller. The second spot is the Samsung Galaxy (Best Buy, 2011). A very different result is seen at Wal-Mart. Wal-Mart does not group the iPads as a tablet, but rather as an eReader. According to Wal-Mart’s best selling list there are four different eReaders placed before the iPad (Wal-Mart, 2011). At Best Buy all the tablets were in a similar price range, but at Wal-Mart the eReaders that have notably fewer functions than the iPad are significantly cheaper. The reduction in rank at Wal-mart may actually be because purchasers are looking for an eReader and not a tablet. Apple’s MacBook is a laptop computer, most of which contain Bluetooth capabilities. Apple does not have its laptops sold in many chain stores. At this time neither Target nor Wal-Mart carry the MacBook. Bestbuy.com does sell the MacBook and it has received five of the top 10 best selling spots. Apple was not in first for best seller but was in third, fifth, sixth, eighth, and ninth spots (Best Buy, 2011). Despite not selling as the top computer, Apple appears to do well selling its laptops to consumers. This is especially impressive with the limited availability at major chain stores. Apple’s iPhone is a cell phone with Internet and a wide range of applications including wildlife field guides, various news applications, fitness tracking, business, finances, and many more. When ranked by best selling Smartphones on bestbuy.com, Apple came in 13th (2011). The Apple iPhone is not sold at walmart.com nor target.com as of yet. Apple’s release of the iPhone 4 with the ability to operate on Verizon Wireless’ phone system was April 28, 2011. With less than one month on the market the phone impresses many users already. Rumors are flourishing on the Internet about the release of an iPhone 5. Apple has neither confirmed nor denied this rumor, making consumers wonder if waiting for the newest phone may be a better option than purchasing the iPhone 4. To break down the strengths, weaknesses, opportunities, and threats involving Apple, Incorporated a SWOT analysis is the most efficient method. As with most companies, Apple highlights the majority of its strengths all over Apple.com. However, unlike many companies, Apple reviews its plans to help fix weaknesses in the company on its website. Apple does notify users and investors of many of its strategies for meeting new opportunities on its website. The following is a quick summary of the Apple SWOT previously performed by Veronica Fritsch, followed by information gained from apple.com to help explain the path they plan to take in the future. When discussing Apple’s strengths it is very important to mention the variability of their products. Apple does not make just computers or cell phones; they have tapped in the electronic entertainment industry by proving a wide range of product types. Apple strives to meet customer demands and provides improvements on the products. Many of their products are available in several colors and Apple has skins and cases that can be put on their products to change the color or design. Apple’s research and development department has been successful at providing updates such as the iPad2, which consumers wanted thinner, lighter, and with a better battery life. Apple is a global company with physical stores in more than 75 countries and the ability to sell online with currency and language converters. Apple is used in many companies both for profit and nonprofit. Apple has an education area on their website, which lists and explains educational benefits of using Apples in school and educational pricing. Apple’s weaknesses are more difficult to spot than their strengths. Rocky financial issues in the past and problems with green advocates are the most notable. Apple has learned from previous financial mistakes and currently has a large amount of savings set aside. They are no longer producing a single type of technology. When the company was started, Apple produced only computers but is now making a wide variety of technological products. Apple’s green problems focus largely on using toxic substances, inability to recycle, and excessive power use. Apple now has various plans in place to help counteract the previous negativity. Ninety-seven percent of Apple’s carbon footprint is from their products not their facilities. So Apple’s green objective is to lower the carbon footprint on all their products. One way the company is working toward this goal is to make lighter, smaller, and thinner products to use fewer raw materials. They have already cut their carbon emissions on all of their products. The most notable cut in emissions is on the 5GB 2001 iPod classic in comparison to the 160GB 2010 iPod classic with a reduction of 50%. The challenge of phasing out toxins is very relevant to the green movement. Apple’s entire product line including the iPad, iPhone, and accessories is now lead-free, BFR-free, PVC-free, and mercury-free. Apple also uses arsenic-free glass in all of its products. Smaller packaging is another environmentally friendly change that Apple has made (Apple, 2011). “By reducing MacBook packaging 53 percent between 2006 and 2010, we ship 80 percent more boxes in each airline shipping container. That saves one 747 flight for every 23,760 units we ship” (Apple, 2011, Transportation). A 13-watt CFL light bulb uses more energy than the 2010 MacBook and the 2010 Apple TV combined. To top all this off, Apple has a recycling program with perks for customers. When customers send in their old computer to Apple, they will receive a gift card for the monetary value of the equipment. If a customer brings an old iPod or any cell phone to an Apple store he or she receives 10% off a new one (Apple, 2011). An area of interest for many investors is the company’s available opportunities. Apple has an undeniable wealth in this area. Not only is Apple involved in the majority of entertainment technology product types but also it has been the pioneer on releasing new product types. Apple has the opportunity to both improve its physical products and to improve on the technology used with its products such as providing new applications for the iPhone. Another opportunity for Apple is the educational system. More school boards and corporations are infusing children’s education with technology such as iPads and MacBooks. With Apple’s current problems with the green movement, it suffices to say that there is definite room for improvement. With a huge surplus of cash Apple will be able to continue to expand without severe increases in liabilities. By increasing the company, Apple will be able to meet more consumer demands and by using savings rather than loans Apple will keep its debt to owners’ ratio low. For all companies, others in the same industry are threats. An abundant amount of technology companies exist, all of which desire sales. When Apple is compared financially and socially to three major competitors, Samsung, Hewlett-Packard, and Dell, Apple is leader in the majority of information checked. However, Apple will need to continue advancing to remain in this secure position. Technology is outdated quickly meaning companies need to be ready for the next release shortly after or preferably before the current release. Part of what makes Apple a top-notch company is Apple’s human resources department. Apple is run by engineers not managers. Though management spots are rare, those that Apple has are former engineers. This helps provide a generally respectful atmosphere and provides for more promotion within (Male, 2011). For the human resources department this means a little less training because the new manager will already understand the workings of Apple. This is especially important because Apple does its best to challenge employees and managers by giving them work slightly above their ability (Male, 2011). When the human resources department hires a new employee, the first thing they look for is a passion for Apple. The employees at Apple want to be there and are avid about the products, mission, and company in general (Male, 2011). Apple also does numerous trainings both in America and abroad. The human resources department must coordinate both the type of training and the training itself. Apple would not be as efficient and profitable without their human resources department. When studying Apple’s ability to remain profitable in an economic downturn, comparing Apple to industry leaders financially, and marketability of their product it is apparent that Apple is not only very profitable but also here to stay. Apple’s SWOT analysis displayed strengths and weaknesses. The company has programs and goals to help limit or eliminate their weaknesses and to turn them into strengths in the long run. Apple is filled with opportunities for growth and may be assisted by its policy of hiring engineers as managers. Whereas Apple has threats to its current prosperous state, they are not in any eminent danger from them. So in conclusion, Apple, Incorporated is definitely a company a mutual fund investor should look into for an investment. References Apple. (2011, May). Retrieved from http://www.apple.com Apple. (2010). Apple three-year financial history. Retrieved from http://files.shareholder.com/downloads/AAPL/1258110290x0x444195/E7A8FE5F-8835-46AB-ACC2-6FA28DFB546D/Three_Yr_Financial_History.pdf Apple Investors. (2011, April 20). Apple reports second quarter results. Retrieved from http://www.apple.com/pr/library/2011/04/20results.html Best Buy. (2011, May). Best Buy. Retrieved from http://www.bestbuy.com Dell Inc. (2010, December). Form 10-Q. Retrieved from http://i.dell.com/sites/content/corporate/secure/en/Documents/FY11-Q3-Final-10Q.pdf Fortune 500. (2011). 35. Apple. Retrieved from http://money.cnn.com/magazines/fortune/fortune500/2011/snapshots/670.html Hewlett-Packard Company. (2011, January 31). Hewlett-Packard Company and subsidiaries consolidated condensed statements of earnings. Retrieved from http://phx.corporate-ir.net/External.File'item=UGFyZW50SUQ9ODI3NjJ8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 Krazit, T. (2009, January 21). Apple proves recession-resistant, for now. Retrieved from http://news.cnet.com/8301-13579_3-10147621-37.html Male, B. (2011, April 22). 8 management lessons I learned working at Apple. Retrieved from http://www.businessinsider.com/management-lessons-from-apple-2011-4 Rusli, E. M. (2011, April 21). A shopping list for Apple's growing war chest. Retrieved from http://dealbook.nytimes.com/2011/04/21/a-shopping-list-for-apples-growing-war-chest/ Samsung Electronics. (2011, April). Earnings release q1 2011. Retrieved from http://www.samsung.com/us/aboutsamsung/ir/ireventpresentations/earningsrelease/downloads/2011/20110429_conference_eng.pdf Target. (2011, May). Target. Retrieved from http://www.target.com Wal-Mart. (2011, May). Wal-Mart. Retrieved from http://www.walmart.com Wikipedia. (2011, May 20). Apple, Inc. Retrieved from http://en.wikipedia.org/wiki/Apple_Inc.#2007.E2.80.93present:_Post-PC_era